As stock plummets, Citi on the brink

Government help may be only option as market cap falls $160 billion in a year

By

SamMamudi

NEW YORK (MarketWatch) -- This time last year, Citigroup Inc. was valued at about $180 billion. As of Friday morning, its market capitalization stood at $20 billion -- and its once-proud share price had shriveled to $3.75, a 16-year low.

Citigroup's share price has dropped more than 60% this week, and analysts are starting to wonder just what the future holds for the financial-services company
C, -0.34%
a Dow Jones Industrial Average component.

There are several options facing Citigroup as it tries to stem the decline.

It could sell some of its business units or even sell itself whole -- both are under consideration, according a Wall Street Journal report -- or it could try to buy itself time and gain market confidence by firing Vikram Pandit as chief executive.

In a worst-case scenario, a government bailout along the lines of that handed to American International Group
AIG, +0.41%
could be used to rescue Citigroup.

What could happen

In a call with senior managers on Friday morning, Pandit reportedly said he intends to keep the bank whole and independent. But events appear quickly to be overtaking Pandit, the former Morgan Stanley executive and hedge-fund manager who took over as CEO last year.

Citigroup's board was meeting Friday to discuss its options, according to a report by Bloomberg. The board may decide to overrule Pandit and sanction sell-offs.

An analyst note Friday from Deutsche Bank illustrated the extent to which the Citigroup's plunging stock price could reduce the bank's value.

"The issue with Citi is the degree to which the downtrend in its stock price affects fundamental factors, as seen with other financial firms over the past few months," said the research brief. "For this reason, we noted in our report that Citi's stock could decline to about half of tangible book value (our $9 price target is set at a 0.9x estimated 3Q08-end tangible book value)."

And if the stock keeps falling, said Randy Frederick, director of trading and derivatives at Charles Schwab & Co.
SCHW, -0.31%
"people will stop wanting to do business with Citi. They'll perceive the company's position as being reflected in its stock price, regardless of what management says."

Selling some of Citigroup's units, particularly brokerage arm Smith Barney, could raise capital and also reposition the firm as a leaner outfit.

Sense of inevitability

"There's value in those units," said Anthony Sabino, professor at St. John's University, speaking about Citigoup's subsidiary businesses. Sabino believes that events will force Pandit's hand.

"The essence of Citi's problem is diversity and incompatibility of its business lines, but that's also its saving grace because it can just sell them off," said Sabino.

In the current market, it stands to reason that there aren't too many candidates prepared to step up and buy. But Sabino said that the pricing could be so attractive that someone will bite.

One problem with Citigrooup being sold whole is that many of the rival banks that would be best placed to make a deal are still busy digesting other acquisitions.

And among international players, Barclays PLC
BCS, +0.53%
is busy with its takeover of Lehman Brothers Holdings
LEHMQ
Sabino suggested that HSBC
HBC, +2.04%
may have a strong enough position to launch a bid, while there has also even been unfounded talk surrounding a prospective merger with Goldman Sachs Group
GS, -0.02%

Schwab's Frederick doubts that Citi would be sold whole. "It'd be hard [for the parties] to come together on a price," he said.

This is in part because of wariness about what toxic assets remain on Citi's books. Nor would other banks be willing to trust Citi's claims about the strength of its balance sheet.

Trust sorely lacking

"If you think back to every big bank that's failed this year, they've all said, 'We're fine,' right up until the end," said Frederick. "It's very difficult to believe those kinds of statements from financial institutions.

Call it, perhaps, the curse of Dick Fuld.

Fuld, the ex-chief executive of Lehman, was protesting his firm's financial health almost until the moment it filed for bankruptcy.

And there are still veterans of Bear Stearns who argue the firm could have survived if it hadn't been plagued by negative market sentiment -- talk that echoes Pandit's claims on Friday morning about the disconnect between Citigroup's stock price and its strong capital position. See full story

D.C., in or out?

Frederick believes it's "very possible" that Washington will end up having to get involved, though not on the same scale as the AIG bailout, which so far is estimated to cost about $150 billion.

He said a something like a 25% stake in Citigroup could be enough to reassure the market. For all the talk of moral hazard, the government is aware of how Lehman's bankruptcy hit the market and would be "very hesitant" to allow another financial pillar to fail, he said.

In Friday's Wall Street Journal, Heard on the Street reporter Peter Eavis suggested that the government needs to be ready to jump in to save Citigroup. Brad DeLong, professor at the University of California, Berkeley, took the notion even further, calling for a Swedish-style government takeover.

"Time to do it. Swedish model. No more of this 'preferred stock capital injection' business. Common stock. And with commitment comes control," said DeLong on his Web site.

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